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Recently, business comment has again been focusing on inflation. Yet again, we believe investors are being misled. The British economy is hardly booming: the travails of retailers will soon spread to commercial landlords; the loss of purchasing power in bankrupt families can only reinforce the downturn. The American economy seems perched on a knife edge, with the Federal Reserve doing for the debt of American consumers, exactly what the Monetary Policy Committee have so successfully done for Britons – slowly bursting the bubble and leaving households stranded.
The real economic issue is that prosperity has come to depend upon the spending of borrowed money. When consumers spend less, business activity must also turn down. As this morning's inflation statistics show, inflation will be dying away as the slow slide into recession spreads around the globe.
The obsession with inflationis as unhealthy as the obsession with the new economy not so many years ago. It is a game of blindly following the revered leader, without questioning the story. Remember that high inflation was for ever (circa 1990), and that the Nikkei Dow index of Japanese equities would go to 45,000 to 60,000? Believe it at your peril.
Use the obsession with inflation as a last chance to pick up decent yields in Government Bonds (Gilts and Treasuries) before the story changes. Why? Because the story will change. It always does.
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